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dc.contributor.author Fajgelbaum, Pablo
dc.contributor.author Schaal, Edouard
dc.contributor.author Taschereau-Dumouchel, Mathieu
dc.date.accessioned 2019-10-29T15:02:20Z
dc.date.available 2019-10-29T15:02:20Z
dc.date.issued 2019
dc.identifier.uri http://hdl.handle.net/10230/42551
dc.description.abstract We develop a theory of endogenous uncertainty and business cycles in which short-lived shocks can generate long-lasting recessions. In the model, higher uncertainty about fundamentals discourages investment. Since agents learn from the actions of others, information flows slowly in times of low activity and uncertainty remains high, further discouraging investment. The economy displays uncertainty traps: self-reinforcing episodes of high uncertainty and low activity. While the economy recovers quickly after small shocks, large temporary shocks may have long-lasting effects on the level of activity. The economy is subject to an information externality but uncertainty traps may remain in the efficient allocation. Embedding the mechanism in a standard business cycle framework, we find that endogenous uncertainty increases the persistence of large recessions and improves the performance of the model in accounting for the Great Recession.
dc.format.mimetype application/pdf
dc.language eng
dc.language.iso eng
dc.relation.ispartofseries Working Papers CREI (Centre de Recerca en Economia Internacional)
dc.title Uncertainty traps
dc.type info:eu-repo/semantics/workingPaper
dc.rights.accessRights info:eu-repo/semantics/openAccess

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